source: Huffington Post; Les Blogues
author: Marc-André Pharand, masters candidate at Laval University, International Relations
translation: doxa-louise
Four Things to Know about Austerity...and Greece
In the last few days, social media have been inundated with self-proclaimes experts on Greece, or more specifically on the question of austerity. Yet, any serious researcher on the subject knows that the Greek situation is eminently complex and that each camp is partly responsible for the current crisis. I would hesitate to call myself an expert, even after having spent over one year studying specifically the Greek situation, and its possible impact on the Eurozone. In the world of social media, however, having spent ten days in Athens makes one an instant expert. Ridiculous.
But that is not the purpose of this text. After the recent victory of the referendum and a victory for the 'no', many think that the austerity question is settled. Not quite.
A 'no' victory heralds an important moment for Greece and the Eurozone, but not the end to austerity. In effect, the referendum was not about austerity, but a vote on a set of proposals by Brussels to end the current impass. It is a rejection of European heavy-handedness. Not austerity.
To better understand the current situation, one must be clear about what one means by austerity. Here is a list of things to know (and which are often omitted):
1-There is no scientifically accepted definition of the concept
Indeed, very few authors even try to define the concept formally. Thus, and as a function of various texts, austerity can became quite encompassing and become a label for a certain kind of policy; or alternatively, austerity takes on a well delimited sense within which one can distinguish what is austerity from what isn't.
For my purposes, the second school, because a generic term has little value in a scientific context. My preferred definition is that used by the IMF, that is that austerity is a governmental policy aimed at reducing the deficit ou indebtedness of a State through the lowering of public spending or an increase in taxation.
2-There are two kinds of austerity
Even if these are not mutually exclusive, it is usual to distinguish between two types of austerity.On the one hand, there is budgetary austerity which a government applies on spending and the other, one that government puts in place through taxation. In reality, a government need not choose between one and the other because it can control spending and its income at the same time. Yet the effects of each type of policy are very different.
Thus, most studies have shown that it is fiscal austerity which has the most effect on a country's economy. In other words, the one most leading to recession. According to data from the IMF and other independent sources, upping taxes by 1% of GDP leads to lowering real GDP by 1,29%! Case studies have confirmed the recession effects of austerity by fiscal means. This is in part what lead to the failure of the first aid effort on Greece between 2010 and 2012.
As for the effects of budgetary austerity, the debate is open. Many studies show that is has virtually no effect on the rest of a country's economy, and many studies show that exact opposite.
Thus, the heart of the problem resides with the evaluation which scientists make of the multiplier effect of public spending. In brief, more the multiplier is high, more expenses have an effect on the economy, and vice versa. It is precisely on this point that the IMF admitted its error in 2013, declaring it had underestimated the importance of the multiplier, which lead to not foreseeing the potentially negative effects of austerity. (See document link below).
3-Structural reforms are not austerity
Even if structural reforms were an essential element of Greece's various bail-out packages, these form no part of what we call 'austerity'. In effect, we have seen that the objective of an austerity package is to reduce the deficit or indebtedness of a country. These are policies that are essentially short-term. In the Greek case, for example, proper austerity policies had objectives such as bringing the public deficit to 2,6% of GDP for 2014, or again lessening the indebtedness ratio of Greece starting in 2013 (examples form the 2010 bail-out package).
Alternatively, structural reforms have quite different objectives.In effect, the objectives were more general and oriented to the mid and long term, such as ameliorating the credibility of Greek authorities or bettering the competitive stance of the Greek economy. it is as a function of this last objective that we saw the government adopt painful reforms of the labour market, in effect a generalized diminution of salaries. Undeniably, such reforms had an impact on the country's public finances but in an indirect fashion. Their objectives were really to affect profound reforms to the Greek economy; more the affair of a long-term political stance for the country than urgency measures such as austerity.
And let us note, such policies have often been imposed to developing counries by the World Bank or the IMF without mentioning austerity as such.
4-Austerity produces mixed results
After close to 5 years of austerity policies in Greece, it is apparent that austerity did not work, at least not at first glance. Looking more closely, one notices that the country's economic situation was showing encouraging signs in 2014. For example, the year 2014 closed on a real positive growth. Certainly, at 0,8% nothing to party about, but after six consecutive years of recession, a return to growth can be seen as a victory for Greece in itself. Other economic indicators were equally hopeful, notably a primary positive budget, a commercial surplus and the employment rate. But all that...was before the political party Syriza.
Yet, if one looks at the global portrait, things ar less cheery. For example, as a result of cuts in the health budget, a study has shown that at lest 60 000 people aged over 65 were deprived of medical assistance since the beginning if the recession.. The HIV infection rate exploded (close to 200%) and infectious illnesses such as malaria came back.
Moreover, the Gini index - which serves to compare the misery of nations - went from 49,1 in 2010 to 61,6 in 2013, which shows that income inequality went up sharply. Certain authors have even argues that the election of Syriza is a direct consequence of policies pursued in those years, an analysis which I share.
* * *
We thus see that Greece underwent austerity policies for the last 5 years. And that austerity is not the only culprit in the current situation, structural reforms having played a role in the evolution of the Greek problématique (everything to do with unemployment and the exodus of young Greeks, for instance).
...
https://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf
Eurostat, the European statistical agency for data
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